Business Context and Reporting Period
The filing is a Form 10-Q for the quarter and six-month periods ended June 30, 2014. The filing identifies the registrant as Rent-A-Center, Inc., not Upbound Group, Inc.; investors should verify the company identity and filing metadata.
Rent-A-Center operated four reportable segments: Core U.S., Acceptance Now, Mexico and Franchising. At June 30, 2014, it operated 2,847 company-owned Core U.S. stores, 1,359 Acceptance Now locations, 176 Mexico stores and 180 franchised stores.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2014 |
|---|---|---|
| Total revenue | $773.2 million | $1,607.0 million |
| Gross profit | $536.5 million; 69.4% margin | $1,099.4 million; 68.4% margin |
| Operating profit | $40.2 million; 5.2% margin | $99.9 million; 6.2% margin |
| Net earnings | $17.5 million | $46.4 million |
| Diluted EPS | $0.33 | $0.87 |
| Operating cash flow | Not separately provided | $69.0 million |
- Cash and cash equivalents were $68.1 million at June 30, 2014, compared with $42.3 million at December 31, 2013.
- Rental merchandise, net, totaled $1.107 billion, including $855.8 million on rent and $247.4 million held for rent.
- Senior debt was $393.2 million and senior notes were $550.0 million. Total debt was approximately $943.2 million before considering cash.
- Capital expenditures were $41.5 million during the first six months; management expected approximately $95.0 million for full-year 2014.
- Dividends declared were $0.23 per share in the second quarter and $0.46 per share for the first six months.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 1.7% and six-month revenue increased 1.7% year over year.
- Second-quarter net earnings declined 58.1%, from $41.9 million to $17.5 million; six-month net earnings declined 47.3%, from $88.0 million to $46.4 million.
- Second-quarter operating profit fell 48.0% and six-month operating profit fell 36.0%. Operating margins declined from 10.2% to 5.2% for the quarter and from 9.9% to 6.2% for the six-month period.
- Operating expenses increased faster than revenue. Six-month salaries and other expenses rose 6.5% to $901.4 million, while general and administrative expenses rose 17.7% to $90.9 million.
- Core U.S. revenue declined 5.3% for the six-month period and operating profit declined 45.7%. Acceptance Now revenue increased 34.9%, while operating profit increased 21.0%. Mexico revenue increased 61.3%, but the segment remained loss-making.
- Same-store revenue decreased 0.2% for the six-month period, primarily because of weaker Core U.S. performance.
- Net interest expense increased 30.7% for the six-month period, and the company recorded $1.9 million of refinancing charges.
- Operating cash flow decreased from $115.5 million to $69.0 million, primarily because of lower net earnings.
Guidance, Outlook, Risks and Unusual Items
- Management described a multi-year transformation program focused on pricing, supply chain, store footprint optimization, store talent and digital commerce, including virtual Acceptance Now capabilities.
- During the second quarter, 150 Core U.S. stores were closed and their accounts merged into existing locations. The company recorded a $4.4 million pretax restructuring charge, including accelerated depreciation, inventory write-offs and lease termination costs. Approximately $4.4 million of future lease obligations remained, with about $1.8 million scheduled for payment in the second half of 2014.
- Acceptance Now and Mexico expansion remained key growth initiatives. The company added a net 34 Acceptance Now locations and 25 Mexico stores during the first six months.
- The company expected operating cash flow and available credit to fund liquidity requirements for the next 12 months. Revolving credit facilities provided approximately $415.3 million of availability at July 21, 2014, and cash was $67.1 million on that date.
- The new $900.0 million senior credit facility was entered into in March 2014. At June 30, actual covenant ratios were within requirements: total leverage of 3.17:1 versus a maximum of 4.50:1, senior secured leverage of 1.20:1 versus 2.75:1, and fixed-charge coverage of 1.83:1 versus a minimum of 1.50:1.
- Variable-rate debt exposes the company to interest-rate risk. Management estimated that a hypothetical 1.0% rate change would affect pretax earnings by approximately $2.5 million.
- Key risks include weaker consumer demand, pressure on Core U.S. profitability, execution of the transformation and store-consolidation programs, merchandise losses and charge-offs, regulatory changes affecting rent-to-own transactions, data security, litigation, foreign currency movements and access to financing.
- Acceptance Now charge-offs for stolen merchandise were approximately 7.0% of revenue for the six-month period, compared with 4.7% in the prior year. Core U.S. charge-offs were approximately 2.8%, compared with 2.4%.
- The company adopted ASU 2013-11 without material impact and expected to adopt the new revenue standard beginning January 1, 2017; the impact was still under evaluation.
- Management stated that disclosure controls were effective as of June 30, 2014, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm whether this Rent-A-Center filing is the intended document for the requested Upbound Group, Inc. 2014 second-quarter summary.
- Assess whether Core U.S. revenue weakness and substantially lower operating margins are temporary or structural.
- Review the sustainability of Acceptance Now and Mexico growth given lower segment margins, elevated charge-offs and Mexico operating losses.
- Reconcile reported debt, refinancing terms, interest-rate exposure, covenant headroom and available revolving capacity.
- Evaluate cash generation relative to rental-merchandise purchases, planned capital expenditures, dividends and required debt service.
- Monitor the financial effects of the 150-store consolidation and the company’s ability to retain revenue from merged customer accounts.
- Review the company’s estimates for deferred-tax reversals, self-insurance liabilities, litigation and other contingencies.